Executive summary
The findings set out in this report are based on the responses that we received to a survey questionnaire that was distributed in 2007 to over 1000 organizations in the GCC. The questionnaire contained 44 questions seeking information about incidents of fraud within the respondent’s organization. We have attempted to provide an insight on the warning signs of potential fraud, its aftermath and most importantly the measures to safeguard an organizations assets against fraud. Most of the respondents to the survey belonged to the top management category in their respective organizations.
The problem of fraud and its extent
More than 40% of the respondents believe that fraud and misconduct is a major problem when undertaking business in the region while more than half expect the level of fraud to increase in the next two years. The cost of fraud reported (not all respondents disclosed information on the value of fraud – some respondents disclosed that they had a been a victim of fraud but chose not to disclose the value) was in excess of US$ 100 million which suggest that the losses resulting from fraud in the region are likely to run into billions of US$ per annum.
Perpetrators of fraud and popular frauds
The survey shows that, compared to KPMG 2004 GCC Fraud Survey, there has been a significant increase in the percentage of internal (management / employee) fraud as a percentage of total fraud – from 48% in 2004 to 65% in 2007. This arose mainly through fraudulent manipulation of financial statements to obtain excessive bonuses or bank funding. Cheque forgery, kickbacks, bribery and procurement fraud also remained popular whilst e-Commerce fraud has emerged as a major type of fraud in terms of value.
Fraud detection and causes
Internal controls continue to be relied upon to detect fraud but almost 40% of fraud was detected by way of notification by stakeholders, anonymous letters or calls. This emphasizes the need for encouraging such mechanisms by establishing secure and trusted channels of communication.
However, almost half of the respondents suggested that early warning signals or ‘red flags’ (e.g.: non compliance with contract specifications, process breakdowns, non-submission or delayed submission of reports and lavish lifestyle) were ignored. Greed and the desire for a lavish lifestyle were reported as the key motives for committing fraud. That said, a number of fraudsters were opportunists. They may not have originally intended to commit fraud but, on becoming more aware of the
ethical climate and poor or non- existent corporate ethics, they “took advantage” of the situation.
New challenges
Economic growth in the region is currently high and this brings new challenges from a fraud risk perspective. This has created more sophisticated businesses but also led to growth of fraud in some new areas – for example, Intellectual property/contract compliance in self-reporting relationships and identity fraud / theft.
Conclusion
Business is booming and fraud is on the increase. Committed efforts to promote a culture of compliance, actively appreciating core values of integrity and honesty and setting the right example at senior levels are a few of the actions that should be implemented by top management to establish the right climate to reduce the risk of fraud. Respondents to the survey regard it as the duty of top management to set an example to the entire organization and to take the lead in fighting fraud.
Organizations in the region appear to have varying levels of understanding as regards the optimal framework for fraud management strategies. A sustained management focus is needed to understand current characteristics related to fraud and misconduct in their organization in order to design a strong, organizationspecific fraud risk management strategy.
Perhaps because of the buoyant regional economies, management of fraud risk is not currently top of the agenda. It should be. In other markets, relative measures have been taken as a result of massive individual frauds or because frauds have been identified when there is a downturn in the economy. For some organizations in this region, it will be too late.
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